Tuesday, June 24, 2014

Textbook algorithmic Sterling trades | How we diversify

On 3rd June last the
Mandelbrot routine entered a EURGBP trade on the short side, which is to say it
had been instructed to only sell the pair if a signal arose through the
algorithm. We had also set the routine to monitor other pairs, including GBPUSD.

The trade proceeded for the rest of
the week without serious incident, barring some excitement around the time of
the ECB announcements about interest rates and Mario Draghi’s subsequent press
conference.

Then, the following Monday,
presumably after market participants had had the opportunity to reflect on
matters, the pair started to fall. It continued to do so for the rest of the
week until, at the start of the next one, the Mandelbrot routine decided to
take off half the position, in order to lock in profit.

It is not always so precise but in
this instance the profit was taken off at exactly the right moment, because the
rate started to rise after that, until the point came where the algorithm caused
the trade to be closed out completely. This happened yesterday, June 24th.

Diversification

The purpose of taking a trade in
another instrument involving the Pound Sterling was in order to provide an
element of diversification. In the case of the GBPUSD pair, this meant instructing
the Mandelbrot routine to only enter on the long side (we expect the pair to
rise).

In this case the algorithm did not
receive a signal to enter until the 5th June, the same day as the
ECB announcements. Thereafter the trade proceeded in a manner similar to the
EURGBP one, with half the position being taken off as shown in the chart above,
and the whole trade being exited yesterday (24th) as well.